LA NFL Stadium Financials: Error In Report To City Of LA Causes Bad News

The LA NFL Stadium issue, where AEG is negotiating to build a new stadium and convention hall and bring a new NFL team to Los Angeles, seemed to turn negative on a Yahoo! Sports report that the numbers “didn’t work.” That caused this blogger to write a blog post, this one, presenting a new analysis.

Well, the continued investigation of that report has turned up a new finding: the consultant’s report from CSL International to the Los Angeles Chief Legislative Officer contained an error in the estimate of Personal Seat License revenue numbers that the consultant said came from AEG, but the consultant failed to double check to make sure they were correct.

This blogger wrote two blog posts at Zennie62.com proving that, particularly because of a healthy projected stream of revenue from what are called “Seat Options” or “Personal Seat Licenses,” the “numbers” did work, and in the scenario presented, AEG / LA Partners (which reflects the partnership between AGE and LA) would realize a $648 million profit after 30 years of revenue collection.

Moreover, the Seat License revenue alone was enough to use to offset annual debt service payments on a bond issue cost of $1.363 billion.

By contrast, the consultant report, prepared by CSL International and submitted July 22, 2011, said this:

Currently, AEG anticipates financing approximately $450 million of the total costs of the stadium, as shown below:

Estimated stadium cost $1,200,000,000
AEG/Team responsibllity (% of total) 100%
NFL G-3 loan $150,000,000
Net PSL Sales (estimated) $150,000,000
AEG/Team contribution, $900,000,000
net AEG/Team Equity $450,000,000
Debt Service Interest rate 7.5
Term 30
Annualdebtpayment~ $38,100,000

Then the consultant states this:

Assuming a 30 year term and an interest rate of 7.5%, the annual debt service would be $38 million. The projected IRR for the stadium operations would be approximately 6.7%, based on a total investment of $900 million by AEG. Final stadium costs could exceed these initial estimates, which would impact the IRR to AEG and also the ability to cover annual City debt service payments from operating revenues from the stadium. If final stadium costs increase by 25% ($300 million), the IRR becomes 3.9% and cash flow after debt service for the stadium would be negative. ObViously, this would create concerns not only as to the ability of AEG to back-stop the debt payments, but also the long-term financial viability of the stadium.

This is where the consultant and AEG screwed up, and it’s not clear that this report was updated as of this writing.

First, the AEG plan in 2011 was for 15,000 club seats to get to $150,000,000 period, they would have to charge $15,000 per seat as a right to buy season tickets for the life of the stadium. Note that the consultant refers to a term of 30 years, right? It’s up there in black and white, and in the jpg pict, too.

That should be expanded so that it’s 35,000 seats at $10,000 – that yields $350,000,000 over the same period.

If AEG elected to do a PSL remarketing effort in 15 years, that would take in another $175,000,000 for a total of $525,000,000.

If we add $525,000,000 to the $700,000,000 naming rights agreement alone, that gives us $1.225 billion, which is about the projected total cost of the stadium, not including other protected revenues.

It appears AEG was really low-balling its number of PSL seats in the planned LA stadium. 15,000 PSL seats in a 76,000 seat stadium is too few, and with an average charge of $15,000 per seat, that cost would be arguably too high for LA fans to want to pay.

While PSL’s are supposed to be for the “life” of the stadium, the reality is that people move and they do sell their season tickets. The stadium owners should set up a way to be able to capture some revenue from the market and a PSL remarketing period’s the best way to go.

Indeed, when season ticket obligations are dumped, the ticket department for the team is tasked with charging the pro-rated PSL cost. So, there is a PSL turnover that’s not factored in when a standard non-remarketing is not considered. The team and stadium developer winds up cheating themselves out of revenue because they didn’t anticipate it.